Single-Member LLCs and Operating Agreements

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A one-owner limited liability business (SMLLC), is a single-member limited company. Although the SMLLC is treated as a sole proprietorship and subject to tax, it has many advantages. An LLC can limit your liability and act like a real business.

To act as a business, you should have the same documentation as other LLC owners. An operating agreement is a document that an LLC has with more than one owner (the owner). It was prepared by an attorney at the time the business started.

This article will explain how an operating agreement works in a single-member LLC and what you should include in it.

What is an Operating Agreement?

An operating agreement is required for all LLCs. This document describes the operation of the LLC and sets out the agreements between owners (members).

An operating agreement is similar in structure to the bylaws which guide a corporation’s board of directors, and a partnership arrangement.

Operating agreements are required for LLCs that have been formed by state laws. Some states require all LLCs to have an operating agreement. Others allow oral agreements.

How an Operating Agreement works

Is an operating agreement necessary if there is only one owner to an LLC? Yes. There are many reasons that a single-member LLC should prepare an operating agreement and follow it.

Protection of the Owners’ Limited Liability Status

To protect the business owner from personal liability, it is important to form an LLC as a sole business owner. Limited liability The operating agreement limits the owner’s exposure to lawsuits and debts.

Establishing the policies for operating the LLC

An operating agreement, which outlines the LLC’s operations and outlines the general policies for the operation of the business, is as important as the one we just mentioned. It also clarifies how LLC funds will be contributed to and distributed to the owners. These policies help the owner make decisions.

Separate the Owner from the Business

An operating agreement and records of operations are essential to establish the separation of the owner and the business for liability and tax purposes. It will be more difficult to prove that your business and you are separate entities if you do not have an operating agreement.

Clarify your business success

The operating agreement clarifies what happens to the business if the owner is unable or dies. It also creates succession planning. If you are unable or unwilling to manage the LLC, your operating agreement should contain a clause. It may prove difficult for your family members to manage the LLC or continue operating it, without this clause.

Avoid State LLC Default Rules

An LLC without an operating agreement is subject to the default rules of the state where it was formed. Your LLC should not be left to the state to decide how to dispose of your business assets. Therefore, your operating agreement must be tailored to your specific situation.

What to Include in an Operating agreement for a Single-Member LLC

Even if the LLC has only one member, a general operating agreement should contain the following.

Purpose and Jurisdiction

Businesses must follow the stated purpose. Your operating agreement, sometimes called a Mission Statement, should contain a purpose statement that identifies your industry and business type. However, it must be broad enough to allow for changes in the products or services you offer. It must also specify the jurisdiction (type or court) in which cases involving your company will be heard.

Ownership and shares

The agreement should describe

  • What and how much capital an owner must contribute to the organization (cash, securities, or other assets).
  • How they determine their ownership percentage and capital account
  • How profits and losses are calculated and distributed
  • What happens to the account of an owner if they die, divorce, or leave?

Management of the LLC

An LLC can be managed by members or a manager. This should be clearly stated in the agreement. A single-member LLC is managed by the owner. However, a professional manager may be more beneficial to you.

Meetings and voting

LLC owners need to meet regularly, similar to a board. The agreement should outline when and how they will be meeting and what decisions will be made (majority, two-thirds vote, or any other). Even if you are the sole owner, it is important to record all policy decisions. Keep a record of all decisions, such as whether you choose a bank or legal counsel and whether you hire an accountant or CPA.

Transfer of ownership

This section is especially important for single-member LLCs as there is no one else to manage the business if the owner becomes incapacitated. This section should detail the procedures for managing the business.

An attorney can help you

While you can find “free” legal forms online that will allow you to create an operating contract, it is better to consult an attorney. An attorney will ensure that all relevant clauses are included and follow your requirements.

Frequently Asked Questions (FAQs).

How can you modify the operating agreement of an LLC?

An LLC has the right to amend its operating agreement at any time. An operating agreement should contain a procedure for making changes.

An LLC owner who is a single member can work with an attorney to make changes. Make sure the date and time are documented. An attorney can help you to draft the changes. This will ensure that they are clear and in compliance with state laws. This template can be used as a meeting minute template.

Does an LLC need to have an operating agreement?

Each state has its requirements for operating agreements. This agreement is required by some states. Some states require this agreement.

For information on forming an LLC, check with your state’s business registration department (usually under the Secretary of State’s Office).

Do operating agreements need to detail who is the LLC’s owner of intellectual property?

Many small businesses own intellectual property (IP) that they use to generate revenue directly or through licensing. This property could have been created by employees or independent contractors (nonemployees). The ownership of the property should be stated in employment agreements.

The company’s IP asset is the operating agreement. It may contain language that states that the company has the right to license intellectual property.

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